Japan’s Core Inflation Hits 3%, Boosting Expectations of BOJ Rate Hike

Japan’s core inflation rate reached 3.0% in February, maintaining pressure on the Bank of Japan (BOJ) to consider further interest rate hikes. This increase follows a warning from BOJ Governor Kazuo Ueda, who cautioned that rising food costs and stronger-than-expected wage growth could push underlying inflation higher. The core consumer price index (CPI), which excludes volatile fresh food prices, exceeded market expectations of a 2.9% increase, continuing to stay above the BOJ’s 2% target for the 35th consecutive month.

Despite a slight slowdown from January’s 3.2% rise, February’s inflation data revealed underlying price pressures. A closely watched index that strips away both fresh food and fuel costs rose 2.6%, the fastest increase in nearly a year. This signals that inflationary trends are broadening beyond just food and energy costs, reinforcing expectations that the BOJ may hike interest rates in its May meeting. Analysts predict, however, that uncertainty over U.S. tariffs may delay such a move until July.

Households continue to feel the impact of rising costs, with notable price increases in essential items. Vegetables soared by 28% year-on-year, rice prices jumped by 81.4%, and electricity bills rose by 9%. Meanwhile, services inflation moderated slightly, increasing by 1.3% in February from 1.4% in January, suggesting that companies are gradually passing on higher labor costs to consumers. The ongoing strength of inflation suggests a potential shift in the BOJ’s policy stance.

The BOJ, which ended a decade-long stimulus program last year and raised interest rates to 0.5% in January, has signaled it may continue tightening monetary policy if inflation remains above target, supported by robust wage growth. A majority of economists expect the BOJ to raise rates to 0.75% in the third quarter, likely in July, as inflationary pressures persist and the central bank revises its economic forecasts in the upcoming policy meeting at the end of April.